A stock simply represent an ownership interest in a company with an expectation of reaping financial benefits if the company performs well.
What is a stock?
When a public company needs money to grow it’s business it can access that money via multiple options, one of which is by issuing stock to the public for a set price. An individual can then buy that stock for a price for which it is currently available in the stock market. By buying stock of a company the individual “owns” part of the company and hopes to make profit by selling at a higher price than initially purchased.
Why should I buy stocks?
Historically, stock market has provided about 8% return. It is one of the easiest way to generate passive income.
With zero trading fees, easy access to company performance, readily available analyst reports, one can buy/sell stocks with just a click of a button.
How can I buy stocks?
The easiest way to buy stock is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what stocks you are interested, buy and hold them, and sell as per your financial needs.
Why do stock prices fluctuates?
Stock price constantly fluctuates based on the supply and demand in the market.
The stock price of a company generally goes up if there are more buyers than seller and vice-versa. Stock price of a company tends to go higher if the company performs well (growth or profit) and thus more people are interested in buying its stock. On the other hand, stock price will drop if the company performs poorly .
Why are stock considered risky?
As stock price constantly fluctuates, you may lose your money if you need to sell at a time when the price is lower than your original purchase price. In fact, in rare cases, you may completely lose your money if company goes bankrupt. Remember, money invested in stocks is not FDIC insured, meaning unlike Bank CDs, you may lose your money in the investment.
How can I mitigate risk?
There are multiple options to lower risk of stock investing:
- Buy Index Funds (basket of multiple stocks)
- Buy Mutual Funds or ETFs (basket of multiple stocks in one category)
- Buy stocks of well-known brands at a reasonable price and hold for long-term
- Buy some bonds as they are more stable than stocks
- Employ Dollar Cost Averaging, that involves buying stock with a fixed dollar amount each month
Final Verdict
Stock market has historically provided about 8% return and is one of the best way to earn passive income. But there are chances of losing money in it. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.
